ANNUAL RESULTS
FOR THE YEAR ENDED 30 JUNE 2023
AfroCentric is a Level 1 JSE listed investment holding company, which owns and operates a diverse range of healthcare-related enterprises that provide specialised medical scheme administration and deliver a range of healthcare products and services to the public and private healthcare sectors. The principal objective of the Group is to ensure the delivery of efficient health management services and the distribution of quality products — all at a manageable and affordable cost for the benefit of our stakeholders. AfroCentric has successfully broadened its interests in the industry by continuing to pursue new opportunities to expand its presence across the healthcare sector.
The Board presents commentary on the results for the year ended 30 June 2023. These results demonstrate a tough economic climate that the Group has operated in, resulting in an overall decline in earnings. This decline is mainly attributed to once off costs associated with various corporate activities and business unit restructuring. One of the business unit restructuring activities was the closure of the Group’s operations in the procurement of hospital surgical consumables through its subsidiary MMed. This closure resulted in significant inventory write off and provisions raised on trade receivables.
The trading in the pharmaceutical cluster has normalised back to pre-Covid levels and therefore decreasing from the high levels experienced in the June 2022 financial year which was driven by the Covid-19 impact. Adverse price adjustments in some of the main product lines of the pharmaceutical cluster has had a negative impact on profitability.
The medical scheme administration business has however sustained its continuous growth in revenue and efficient servicing costs through digital enablement.
The Services Cluster, substantially comprising of the medical scheme administration business, has mainly focused on cost reduction through increased efficiency and an enhanced operating model, seeking to maintain operating margins while addressing member needs for affordable, quality care.
Our unwavering commitment to optimising operations through digital transformation, leveraging technological advancements, data utilisation, and business engineering capabilities has resulted in greater efficiencies and improved delivery, and has propelled the achievement of the Cluster’s strategic objectives. Medscheme’s administration business powered by their administration platforms had to adapt to unstable data networks as a result of the continuous loadshedding in the market which impacted profitability.
Membership under administration has shown a marginal increase despite challenging economic conditions. This was driven by continued growth in the GEMS and Polmed medical schemes amid successful member retention endeavours. Bonitas continues to grow as the second largest open medical scheme in South Africa supported by good reserves and below market contribution increases. The impact of economic and affordability pressures have also been evident in our open schemes as low-cost options recorded growth. Despite the volatility of our operating environment, the Cluster has seen a 2.6% growth in revenue.
The operating profit was significantly impacted by non-recurring costs (investment on the IT system modernisation, business acquisition costs incurred in facilitation of the Sanlam transaction “for unlocking future synergies and collaboration”), costs associated with prolonged loadshedding, as well as the additional legal costs incurred on the second arbitration of the NHA case. The overall impact of these costs was a reduction in the Cluster’s operating profit by 15.5%.
The Pharma Cluster had a challenging year, resulting in a decline in operating profit by 41.1%. The decline is mainly influenced by the Group’s decision to close down its operations in the procurement of hospital surgical consumables through its subsidiary MMed. This closure has resulted in inventory write off and provisions raised on trade receivables (total operating profit impact R65.0 million).
Pharmaceutical sales were also impacted by a general slowdown in over-the-counter/ HIV medicine, lower adherence by patients to chronic medicine, a reduction in SEP, as well as uncertain consumer spending patterns on preventative medicine.
Pharmaceutical sales were also affected by supply instability from manufacturers, leading to occasional out-of-stock issues, particularly for some of our main products. To overcome these hurdles and improve overall performance, the Cluster has focused on introducing new products, enhancing efficient working capital management to address both overstock and understock challenges, and implementing cost-reduction strategies.
In addition to the cost-reduction strategies, the Cluster has also focused on strategies to increase revenue and improve the patient experience. This included projects to increase adherence by patients to chronic medicine, savings on clinical costs by digitising several processes, and projects to optimise courier costs. The action plans have already yielded positive results, with a reduced overall cost per script and an increased number of scripts.
On a positive note, Pharmacy Direct retained three of the provinces and secured two additional provinces in the recent CCMDD tender. However, the tender came at a reduced price per script, marginally affecting the contract’s profit. The profitability of the contract will be closely monitored, and measures will be put in place to implement various strategies to reduce costs, including streamlining dispensary operations.
The Corporate Solutions Cluster comprises various entities that support the overall, uniquely integrated, employee-focused health and wellness solutions offered to corporate and institutional clients. The Cluster’s interactions and activities contribute to a reduction in primary healthcare costs, while increasing productivity and delivering tangible savings to employer groups.
Notwithstanding the lower operating profit compared to the Services and Pharmaceutical Cluster, it’s impact has been seen in the value proposition to its clients.
We have seen over 40% membership growth on the primary health insurance policies for the year, with net positive contribution coming from the corporate sector. Membership within the retail sector of the primary health insurance business remained stable.
There was also notable growth within the gap business, with a membership growth rate of over 13% year-on-year. This growth was evenly distributed between the corporate and retail sectors. The Sanlam Gap product also saw the successful launch of the Mediclinic Extender option, which is gaining significant traction in the market.
The Group’s revenue for the year grew by 2% from the prior year — the muted growth has been affected by the trading in the pharmaceutical cluster that has normalised back to pre-Covid levels therefore decreasing from the high levels experienced in the June 2022 financial year which was driven by the Covid-19 impact, the adverse price adjustments in some of the main product lines of the pharmaceutical cluster, reduction in sales of preventative medicine, reduced adherence to chronic medicine by patients, the impact of the drop in ARV pricing, the marginal membership growth, and membership buy down of options.
The Group’s profitability has also been significantly impacted by non-recurring costs (investment on the IT system modernisation, business acquisition costs incurred in facilitation of the Sanlam transaction “for unlocking future synergies and collaboration”), costs associated with prolonged loadshedding, the additional legal costs incurred on the second arbitration of the NHA case, and the costs incurred pursuant to the decision to close the operations in the procurement of hospital surgical consumables.
Pursuant to these additional costs incurred, the Group’s profit before tax decreased by 37.0% to R426.5 million (2022: R676.7 million). The Group’s profit from continuing operations decreased by 39.3% to R294.9 million (2022: R485.7 million).
During the period under review, AfroCentric Health acquired the remaining 49% shares in AfroCentric Distribution Services (ADS) effective 1 July 2022. ADS performs a critical role through its marketing and support services for medical schemes.
Effective 29 May 2023, Sanlam Limited acquired 60% controlling shareholding in AfroCentric Group. The transaction adds a strong healthcare capability to Sanlam’s existing suite of financial products. Sanlam will integrate AfroCentric’s product offering into its ecosystem.
Trading in both the pharmaceutical and services clusters started normalising in the last quarter of the financial year, leading up to the date of this publication, and is continuing.
Management is confident that the Group is returning back to its historical profitability and cash generation levels.
We are exceptionally pleased to have concluded the Sanlam transaction. Broad goals include sharing of assets and capabilities, and developing a complete and integrated client value proposition (for retail and corporate clients).
The long-term synergies includes, to name a few:
The Group’s core business remains sound with good diversification in the private and public medical scheme membership. A focus for the Group will be to optimise its spend on IT which will then enable the operations to become more efficient in its service model.
The Group’s objective will remain on yielding synergies and the integration of various businesses and products, as well as enhancing the elements of the Group’s businesses to leverage the full benefits of being the most diversified healthcare group in Southern Africa.
The following changes were made to the Board during the period under review:
On 3 July 2023 it was announced that, through mutual agreement between the Group and A Banderker (the current AfroCentric Group Chief Executive Officer), A Banderker will leave AfroCentric to take up a role in the wider Sanlam Group effective 1 November 2023. G van Wyk was appointed to the role of CEO Designate: AfroCentric Group, effective 1 August 2023 until 31 October 2023, after which he will assume the role of Group Chief Executive Officer.
After assessing the Group’s funding and working capital requirements for the short term, the Board prudently decided not to declare a final dividend.
A new dividend policy is being considered linked to the short term acquisition and investment opportunities.
Although these financial results were themselves not audited, they are extracted from the consolidated and company annual financial statements which were audited by PricewaterhouseCoopers Inc. who issued an unmodified audit opinion on the financial statements.
The Consolidated Financial Statements have been prepared in accordance with and contain disclosure required by IAS34 Interim Financial Reporting, the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), as well as the SAICA Financial Practices Committee, Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, the JSE Limited Listings Requirements and the requirements of the Companies Act of South Africa, No. 71 of 2008, as amended (Companies Act).
The accounting policies applied in the Summarised Financial Statements are the same as those applied in the Group’s Audited Consolidated and Separate Annual Financial Statements for the year ended 30 June 2022.
The annual financial statements together with the audit opinion thereon are available on our website, or at our offices upon request. The Board of directors (the Board) takes full responsibility for the preparation of this report.
These Consolidated Financial Statements have been prepared under the supervision of Hannes Boonzaaier CA (SA), Group Chief Financial Officer.
The AfroCentric Board, individually and collectively, accepts responsibility for the information contained in this announcement insofar as it relates to AfroCentric. In addition, the AfroCentric Board confirms that, to the best of its knowledge and belief, the information contained in this announcement, as it relates to AfroCentric, is true and correct and, where appropriate, does not omit anything that is likely to affect the importance of the information contained herein pertaining to AfroCentric and that all reasonable enquiries to ascertain such information have been made.
On behalf of the Board
Dr ATM Mokgokong
Chairperson
Johannesburg
18 September 2023
Mr A Banderker
Group Chief Executive Officer